Ausel's is considering a five-year project that will require $738,000 for new fixed assets that will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for 18 percent of their original cost. The project is expected to generate annual sales of $679,000 with costs of $321,000. The tax rate is 22 percent and the required rate of return is 15.2 percent. What is the amount of the aftertax salvage value?
A) $105,165.60
B) $103,615.20
C) $104,409.20
D) $132,840.00
E) $118,406.90

Question

Quizplus · Accepted Answer

First, we need to calculate the annual cash flows for the project:
Year 0: -$738,000 (initial investment)
Years 1-5: ($679,000 - $321,000) x (1 - 0.22) = $278,920
End of Year 5: $738,000 x 0.18 x (1 - 0.22) = $72,695.20

Next, we can calculate the present value of these cash flows using the required rate of return, 15.2 percent:
PV = -$738,000 + ($278,920 / 1.152) + ($278,920 / 1.152^2) + ($278,920 / 1.152^3) + ($278,920 / 1.152^4) + ($351,615.20 / 1.152^5)
PV = -$738,000 + $228,141.85 + $197,268.30 + $170,095.95 + $146,978.63 + $203,186.93
PV = $207,671.66

Finally, the aftertax salvage value is the amount received from selling the fixed assets minus the taxes paid on that amount:
Aftertax Salvage Value = ($738,000 x 0.18 - $207,671.66) x (1 - 0.22)
Aftertax Salvage Value = $103,615.20

Therefore, the best choice is B.

Ausel's Is Considering a Five-Year Project That Will Require $738,000